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5 Short Sighted Stock Spinoffs

Initially a top secret development called "Project X" in 1991, big box electronics retailer
Circuit City opened its first
CarMax(KMX - Get Report) store in 1993 and grew used car dealership business over nearly a decade, until it decided to spin the unit to realize its full value and focus on the increasingly competitive retail electronics market.

Speaking in the mantra of divestitures, Circuit City's Chief Executive at the time Alan McCollough said that a spin would benefit growth and share prices. "CarMax has produced solid sales and earnings growth during the past two years and is now able to support its growth with no assistance from Circuit City," said McCollough in a move that would "enable the investment community to analyze each business on its own merits."

The move was also part of a restructuring plan as Circuit City's earnings estimates for the quarter would fall far short of expectations. After announcing the spin and an earnings cut, Circuit City's shares dropped by over 30%.

In Oct. 2002, Circuit City spun CarMax in a dividend to shareholders. At the time, CarMax operated 33 used car superstores and 18 new car franchises, in 12 states. Since then, CarMax has tripled its stores and generated record sales and profit in 2011. In that time span, Circuit City saw its store count go from 603 to zero when the company filed for bankruptcy in Oct. 2008 after a credit crunch led to tighter credit terms from vendors and an economic crisis shelved consumer spending.

The-59-year old electronics retailer initially filed Chapter 11 reorganization, however a little over a year later, the company converted the bankruptcy into a Chapter 7 liquidation after being unable to find a buyer, spurring the sale of its inventory and the closure of its stores. While the credit crunch drained Circuit City's liquidity and a recession made its electronics sales slow, the company's brick and mortar business model was imperiled by the growing shift of consumer spending to online retailers like
Amazon(AMZN).

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At CarMax the recession and a growing adoption of Web-based shopping had a far different impact. As auto spenders retrenched, they flocked to CarMax's used cars, keeping the company profitable through the recession. Meanwhile, auto buying didn't face the same threat from the Web as big box retailers, with consumers generally still making purchases in showrooms.

In 2011, CarMax earned a record $380 million in profit on its highest ever sales of $8.9 billion. Meanwhile, its shares have more than doubled since the spin.

While it's unclear whether Circuit City had the financial strength to hold onto CarMax, the unit was an earnings hedge to both the economic cycle and the threat of online retailers. Ultimately, the spin was part of a corporate strategy that led to Circuit City's dissolution, while CarMax has since thrived.

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